Strategic Interaction

Strategic interaction is the defining feature of any situation where each player's payoff depends not only on their own actions but also on the actions chosen by other players. Rational decision-making in a strategic situation therefore requires each player to form expectations about what the others will do — and to account for the fact that the others are doing the same. Game Theory provides the formal tools to model and predict outcomes in strategic situations.

A game is a formal description of a strategic situation specifying the players, the strategies available to each, and the payoffs for every possible combination of strategies. Classic examples from Topic 3 include two firms deciding whether to hire a marketing agent (Prisoner's Dilemma structure), two players coordinating on which venue to attend (Battle of the Sexes), and oligopolists choosing price or quantity. See Topic 3 — Game Theory for the full development.

When to use

Recognise a strategic interaction whenever one agent's optimal choice depends on what another rational agent does, and vice versa. This is distinct from a decision problem (where outcomes depend only on your own choice and some fixed external environment). The presence of strategic interaction means you must use equilibrium concepts — Nash Equilibrium, iterated dominance, or mixed strategies — rather than straightforward optimisation.